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Asia Competition Barometer Information technology servicesAn Economist Intelligence Unit report
Supported by
© The Economist Intelligence Unit Limited 2012 1
Asia Competition Barometer:Information technology services
Contents
Preface 2
Executive summary 3
Asia’s growing importance for corporate performance and global competitiveness 5
Competition and profitability at Asian firms 7 Competition: Increasing concentration, but still highly competitive 7
Profitability:Onthedeclineoverall,butpocketsofgrowthexist 8
Case study: Wipro 10
Positioning for success in Asia 11 Competingforthenewfrontier:Asia’smarekts 11
FirmswillbroadentheirfootprintacrossAsiaforefficientservicedelivery 13
Emergenttechnologies 13
Case study: TIBCO Software 14
Outlook 15
Barometer methodology 17
© The Economist Intelligence Unit Limited 20122
Asia Competition Barometer:Information technology services
SupportedbySingapore’sEconomicDevelopmentBoard(EDB),theEconomistIntelligenceUnithasdevelopedtheAsiaCompetitionBarometerwiththeaimofunderstandingthechangingmarketdynamicsinkeysectorsandassessingtheintensityofcompetitioninthem.Drawinguponcompany-leveldataonprofitabilityandotherindicators,theBarometerquantifiesthechangingdynamicsofcompetitivenessinAsiaforselectindustriesbetween2004and2009.
ThisreportfocusesontheBarometerfindingsfortheinformationtechnology(IT)servicessector.Assessingauniverseof296ITservicescompaniesthatarepubliclylistedineightcountries—China,India,Indonesia,Malaysia,thePhilippines,Singapore,ThailandandVietnam—theBarometerexamineschangingprofitabilityandthecompetitionlandscapefortheITservicessector.
Otherreportsinthisserieslookatthetransportandlogistics,precisionengineering,petrochemicalsandchemicals,andpharmaceuticalssectorsinAsia.
January 2012
Preface
© The Economist Intelligence Unit Limited 2012 3
Asia Competition Barometer:Information technology services
Executive summary
WhatdoestheemergenceofAsiaasamajorengineofglobaleconomicgrowthmeanforcompaniesoperatingintheregion?Asia’srobusteconomicoutlook—coupledwithdiminishedgrowth
prospectsinmanyotherpartsoftheworld—hasattractednewinvestmentintothemarketbothfromregionalplayersandWesternmultinationals.Asaresult,competitionintheregionisexpectedtointensify.Giventhedarkeningglobaleconomicoutlook,andtheexpectedimpactonsomeeconomiesandsectorsintheregion,growthandprofitabilitylookuncertaininthenearterm.Butoverthemediumtolongerterm,Asia’sstrongeconomicfundamentalswillensureconsistentgrowthacrossarangeofindustries.HowarecompaniespositioningthemselvestocapitaliseonAsia’sgrowthopportunitiesoverthenextfewyears?
TheAsiaCompetitionBarometerassessestheintensityofcompetitionandchangingmarketdynamicsinseveralkeysectors.Thisreportexaminesinformationtechnology(IT)services,whichincludethefollowingsub-segments:softwaredevelopment,includingcomputergames;ITprogramming;ITconsultancy;ITfacilitiesmanagementservices;otherITandcomputerserviceactivities;dataprocessing,hostingandrelatedactivities;andwebportals.
Amongthekeyfindingsofthisreportarethefollowing:
• Asia’s IT services sector has been expanding rapidly, in line with the region’s stellar economic growth.Severalbroadmacroeconomictrends,includingglobalcorporations’increasingappetiteforoutsourcingtheirinternalfunctionstoAsia,higherdemandforITservicesfromfast-growingAsianfirms,andrisingdesktopPC,Internetandmobilephonepenetrationrates,haveboosteddemandforITservicesintheregion.AccordingtotheEconomistIntelligenceUnit(EIU),between2001and2010,ITservicesspendinginAsiadoubledfromUS$45.6bntoUS$90.7bn.Despitethesombreglobaleconomicoutlook,theEIUforecaststhatITservicesspendinginAsiawillreachUS$141.3bnby2016.
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Asia Competition Barometer:Information technology services
1Weassessedatotalof296publicly-listedITservicesfirmsinAsiabetween2004and2009.In2009,therewere279whowerelistedandpublishedfinancialstatements.
• The number of players, homegrown and global, is rising.Thenumberandsizeofpublicly-listedfirmsintheITservicessectorinAsiahasincreaseddramatically.Thetotalnumberoflistedcompaniesintheindustryrosebymorethan30%between2004and2009,from211firmsto279.1 Total combined revenues nearlytripledfromUS$16.7bntoUS$46.3bnduringthesameperiod.Meanwhile,inrecognitionofAsia’sincreasing importance to the global IT services sector, foreign MNCs have been building up their presence intheregion.
• Despite a slight increase in market concentration, competition in Asia’s IT services sector remains fierce.Amongpublicly-listedAsianfirms,theindustry’slargestplayersincreasedtheirmarketsharebetween2004and2009.However,Asia’sITservicesmarketremainshighlycompetitive,andamorecrowdedplayingfieldwillcontinuetoputpressureonprofits.Smallerplayersmayhaveaparticularlydifficulttimeinthefuturefortworeasons.First,globalfirmsseekingoutsourcingpartnerstoenhancetheirownoperationalefficiencies—akeydriverofgrowth—willbelookingforcompanieswithsizeandscale.Second,smallandmedium-sizedenterpriseswhomightotherwisehavebeencustomersforthesesmalleroutsourcedserviceprovidersmayswitchtoon-demandITcapabilitiesavailableviacloudcomputingservices,forgoingtheneedforthird-partyITservicesplayersaltogether.Nevertheless,therewillcontinuetobeopportunitiesforsmallfirmsthatcanprovideahighlyspecialisedornicheservice.
• Profitability in Asia’s IT services sector has been declining, and margins in some markets, such as India, may have peaked.Theaveragegrossmarginofpublicly-listedAsianfirmsdeclinedfrom47.8%in2004to41.2%in2009.Competitionisonlyonefactorpushingdownprofits.Anumberofothers—fromtheglobaleconomicdownturn,thecommoditisationofcertainservices,risingwagesandtheadventofcloudcomputing—haveputpressureonmargins.Tomaintainprofitability,manyfirmswilltrytomoveupthevaluechain,focusingonwhatisreferredtoas“non-lineargrowth”—thatis,increasingrevenuebutnotheadcount—throughR&Dandbyleveragingnewtechnologiesandapplications,firstandforemostthoseenabledbycloudcomputing.
• Industry-leading firms could bring growth to other markets as they seek to escape rising costs at home.Givenrisingwages,firmsoperatinginIndia,whichhavebeenthemarketleaderstodateinthissector,havebeenexpandingtoemerginglow-costcentres,suchasthePhilippines.Thistrendwillcontinue,asITservicesfirmsarestillintheearlystagesofleveragingtheirglobalfootprintforthemostcost-effectiveservicedelivery.Thisshiftwillalsoprovidegrowthopportunitiesfordomesticfirmsinthesenewmarkets.
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Asia Competition Barometer:Information technology services
Asia’s growing importance for corporate performance and global competitiveness
Overthepastdecade,Asiahasrapidlygrowninimportancetotheglobaleconomy.ItsshareofglobalGDP,measuredinpurchasing-powerparityterms,increasedfrom26.8%in2001to33.8%in2010.2
By2016,theEconomistIntelligenceUnit(EIU)expectsthisproportiontoriseto38.9%.TherearethreebroadtrendsassociatedwithAsia’srapidgrowthanddevelopmentthathavebeen
drivingitsITservicessector.Thefirstisglobalisation,andglobalcorporations’increasingappetiteforoutsourcingtheirinternalfunctionstoplacessuchasChina,India,MalaysiaandthePhilippines.Thistrendhasloweredcostsfortheseglobalcorporations,spurredthegrowthofnumerousAsianITservicesfirms,andraisedthestandardoflivingforthousandsofITservicesprofessionalsintheregion,whohaveseentheirwagesrisecontinuously.
ThesecondisgrowingdemandfromAsiancompanies.ThousandsofAsianfirmsacrossarangeofindustrieshavegrownexponentiallyoverthepastdecade,intandemwiththeregion’sgrowth.Some,suchasHaier,aChinesewhitegoodsfirm,andTata,anIndianconglomerate,arenowhouseholdnamesinmanypartsoftheworld.Asthesefirmshavegrownandexpanded,theyhaveincreasedtheirconsumptionofITservices.TheadoptionofsomeITinnovations,suchasenterpriseresourceplanning(ERP)and,morerecently, cloud computing services, has transformed traditional business models, boosting productivity at Asianfirms.
ThethirdtrendistherapidlygrowingPCownershipandInternetpenetrationratesinAsia,whicharedrivingdemandforITservicesamongconsumers.ThestockofPCsper100peopleinAsiaandAustralasiaincreasedfromabove4in2001toalmost19by2010,accordingtotheEIU.3Weexpectthistoclimbtomorethan30per100peopleby2016.Meanwhile,InternetpenetrationinAsiaandAustralasiaincreasedfromabout5usersper100peoplein2001to24in2010.Weexpectthistorisetomorethan36per100peopleby2016.
Chinahastheworld’sbiggestpopulationofInternetusers,withabouthalfabillionpeopleonline
2AsiahereincludesBangladesh,China,HongKong, Indonesia, India, Japan, South Korea, Malaysia, Myanmar, Philippines, Pakistan,Singapore,SriLanka,Thailand,Taiwan,andVietnam
3AsiaandAustralasiahereincludesAustralia,China,HongKong,India,Indonesia,Japan,Malaysia,NewZealand,Pakistan,Philippines,Singapore, South Korea, Taiwan,Thailand.
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Asia Competition Barometer:Information technology services
today.Ofthose,morethan300mareregisteredmicrobloggers.4ThisspikeinthenumberofInternetusersinAsiaisahugedriverfortheITservicessector,particularlyforthoseenterprisesengagedinthefieldsofweb-basedapplications,socialmedia,andInternetgaming.
Similarly,deepeningmobilepenetrationaroundAsiahasalsobeendrivinggrowthintheITservicessector.ThemobilesubscriptionrateinAsiaandAustralasiaincreasedfromunder11%in2001tomorethan70%in2010.TheEIUexpectsthistorisetomorethan110%by2016.CountriessuchasMalaysia,SingaporeandVietnamalreadyhavepenetrationrateswellabove100%.Thishascreatednumerousopportunitiesforvideogameandapplicationdevelopers,aswellasothersoftwareproviders.ManyAsians,particularlyinremoteareas,willbeincreasinglyconnectingtotheInternetprimarilythroughmobiledevices,boostingdemandforhigher-valuemobileservices.
AsiaisincreasinglyimportantforcorporateperformanceintheITservicessectorglobally.Forinstance,AsiarevenuesatOracle,anAmericanITservicesfirm,morethandoubledfromUS$1.4bnin2003toUS$3.4bnin2009.Meanwhile,between2006and2009,AmericanvideogamedeveloperActivisionBlizzard’sAsiarevenuesalmostdoubledfromUS$135mtoUS$263m.
ForeignITservicesfirmshavebeenoperatinginAsiaforseveraldecades.Recently,inrecognitionofAsia’sgrowingimportance,theyhavebeeninvestingheavilyintheregion.BetweenJanuary2003andSeptember2011,fDiMarkets,aresearchhouse,recordedatotalof4,070ITservicesinvestmentprojectsinAsia.5MostofthoseinvestmentsoriginatedfromtheUS(60%oftheinvestmentprojects),theUK(7%)andIndia(4%).ThetopthreeinvestmentdestinationmarketswereIndia(30%oftheinvestmentprojects),China(21%)andAustralia(9%).
IBM,anAmericanITservicesandconsultingfirm,planstoinvestRM1bn(US$317.2m)inanewglobaldeliverycentreinMalaysia.SAP,aGermansoftwareandservicesfirm,morethandoubeditsheadcountinAsiabetween2004and2009from4,863to10,248.Asaproportionofthefirm’stotalglobalworkforce,SAP’sAsiateamincreasedfrom15.1%in2004to21.5%in2009.
MajorplayersintheITservicessectorobviouslyseeopportunityinAsia.Buttherearealsochallenges.TheseincludeashortageofITservicesworkers,whichhasledtospirallingwages.ManyfirmsinAsiaalsofacethechallengeofrefocusingtheirattentionawayfromdevelopedmarkets,whereeconomicgrowthisslowing,towardsemergingmarkets,whichhavearelativelyrobusteconomicoutlook.Thisswitchwillrequirenewcorporatestrategies,includingarethinkingofglobalhumanresourcedeployment.ITservicesfirmsarealsohavingtoquicklyadjusttotheadventofcloudcomputing,whichhasledtoarangeofalternativeofferingstomanagedITservices.LinguisticdifferencesalsopresentachallengeinAsia,particularlyforfirmshopingtopenetratemarketsthatuse“double-byte”charactersets,suchasChina,JapanandKorea.6
Finally,softwaredeveloperswillcontinuetosufferfromlossesassociatedwithintellectualpropertytheft,despiteAsiangovernments’effortstoclampdownonit.GaryLocke,theUSAmbassadortoChina,recentlynotedthatthevalueoflegitimatesalesofsoftwareinVietnamishigherthaninChina,whosepopulationis15timesasbig.7ArelatedchallengeformultinationalsoftwarefirmsinAsiaisinmakingoriginalsoftwareandservicesmoreaffordabletotheSMEsegment,possiblythroughcloudcomputingservicesorthroughflexiblepaymentschemes.
5fDiMarketsdefinesthesectoras“Software&ITservices”
6Adouble-bytecharacterset is one that represents eachcharacterwith2bytes.Chinese, Japanese and Korean arealldouble-bytelanguages.English, by contrast, is a single-bytelanguage.
7GaryLockeurgesChinanot to interfere in business decisions”.The China Post.Nov19th2011
4“China’smicrobloguserpopulationtops300million”.Xinhua.Nov21st2011
© The Economist Intelligence Unit Limited 2012 7
Asia Competition Barometer:Information technology services
Competition and profitability at Asian firms
ReflectingtheboominggrowthinAsia’sITservicessector,thenumberandsizeofpublicly-listedfirmsinAsiahasincreaseddramatically.Thetotalnumberoflistedcompaniesintheindustryrose
from211in2004to279in2009,whiletheirtotalcombinedrevenuealmosttripledfromUS$16.7bntoUS$46.3bn.Theinfluxofnewplayers,bothAsianandnon-Asian,hasledtoahighlycompetitiveoperatingenvironment.
Competition: Increasing concentration, but still highly competitiveWithmanycompaniesraisingtheirexpectationsofAsiaforgrowthandprofits,itisreasonabletoexpectcompetitionintensityintheregiontoincrease.TocapturethisintensitywehaveusedtheHerfindahl–HirschmanIndex(HHI),whichmeasuresthemarketconcentrationofanindustry’slargestfirms.HHI
Figure 1: Herfindahl–Hirschman Index
4.0
4.5
5.0
5.5
6.0
200920082007200620052004Source: Economist Intelligence Unit
2004 2005 2006 2007 2008 2009
Herfindahl—Hirschman Index (HHI) 5.77 5.66 5.08 5.78 5.44 4.34
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Asia Competition Barometer:Information technology services
valuescanrangefrom0(extremelyfragmentedmarket)to1.0(monopoly).Herewehavemultipliedthevaluesby100toachieveascaleconsistentwithprofitabilityindicators(seebelow).TheHHIforAsia’sITservicesindustryincreasedfrom4.88in2004to5.73in2009(seeFigure1),signifyingthatthe50biggestfirmsintheBarometerincreasedtheirmarketconcentrationoverthatperiod.8
Thetotalnumberoflistedcompaniesintheindustryincreasedfrom2004to2009,atthesametimethatthethreelargestcompanies—TataConsultancyServices(TCS),InfosysandWipro,threeIndianITservicesfirms—grewtheircombinedrevenuesharefrom31.8%to37.4%(seeFigure2).
8Ameasureofthesizeofcompanies in relation to the industry, and an indicator of the amount of competition amongthem,theHHIisdefinedasthesumofthesquaresofthemarketsharesofthe50largestfirmsfromtheuniverseof296listedcompaniesassessed.FormoreinformationontheBarometermethodology, please refer to thelastsectioninthisreport.
Figure 2: Top ten publicly-listed Asian firms by turnover
Company Country of origin 2004 turnover (US$bn) 2009 turnover (US$bn)
Tata Consultancy Services India 2.19 6.75
Wipro India 1.83 6.10
Infosys India 1.67 4.91
ECSHoldings Singapore 1.45 2.53
HCLTechnologies India 0.63 2.20
Xiamen Xinde China 0.37 1.36
Satyam Computer Services India 0.78 1.24
Aisino China 0.31 1.12
Mphasis India 0.17 0.96
Patni computer systems India 0.33 0.71
Note:ThesearethetenbiggestcompaniesbyturnoverthatwereanalysedintheBarometer,whichconsideredonlypubliclylistedfirmsineightcountries:China, India, Indonesia, Malaysia, the Philippines, Singapore, Thailand and Vietnam
Thisincreasedmarketconcentrationsuggeststhatdespitetheentryofnewfirmstothemarket,therehasbeenaslightfallincompetition,asthebiggestfirmshavebecomemoredominant.Nevertheless,theAsianITservicessectorremainshighlycompetitive,asdenotedbyitslowabsoluteHHIscore.
Profitability: On the decline overall, but pockets of growth existTomeasuretheprofitabilityoftheITservicessector,wedevelopedacompositeindexoffiveratioswhichmeasuredifferentaspectsofacompany’smargins(formoredetails,seethenoteonmethodologyattheendofthisreport).AllprofitmarginsfortheITservicesindustryhavefallenrelativeto2004(seeFigure3).Profitabilityshowedthesteepestdeclinebetween2007and2008.9Thiswaspartlyareflectionofthegatheringfinancialstormattheendof2007thatledtosomeclientsindevelopedmarketscuttingITspending.
Profitabilityhasalsobeenhurtbyseveralbroaderindustrytrends,includingthecommoditisationofcertainITservices,whichislikelytocontinue.Theadventofcloudcomputing,meanwhile,hasledtoarangeofalternativeofferingstomanagedITservices,puttingfurtherpressureonprices.Marginsarelikelytoremainunderpressure,particularlygiventheentranceofnewcompetitorsintotheindustry.RisingwagesinmanypartsofAsiahavealsoeatenintoprofits.Asaproportionofoperatingrevenues,totalwagesroseonaveragefrom30.6%in2004toalmost40%by2009.Operatingrevenueperemployee
9ThecompositeProfitabilityIndexismadeupoffiveratios that each represent a different aspect of a company’sprofitability.Formore information on the Barometermethodology,please refer to the last section inthisreport.
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Asia Competition Barometer:Information technology services
fellfromUS$122,000in2004toUS$86,000in2009.Tomaintainprofitability,manyfirmswilltrytomoveupthevaluechain,focusingonwhatisreferredtoas“non-lineargrowth”—thatis,increasingrevenuebutnotheadcount—throughR&Dandbyleveragingnewtechnologiesandapplications,firstandforemostthoseenabledbycloudcomputing.
Figure 3: Profitability Index
60
80
100
120
200920082007200620052004Source: Economist Intelligence Unit
2004 2005 2006 2007 2008 2009
Profitability index 115.3 100.0 93.2 100.4 75.2 83.3
EBITDAmargin(%) 24.0 21.1 19.9 23.3 16.4 17.4
Grossmargin(%) 49.8 43.0 39.7 39.4 33.7 39.8
Returnoncapitalemployed(%) 14.1 12.5 11.8 14.5 8.0 5.8
Returnonequity(%) 16.0 13.5 12.8 16.3 6.7 5.4
Returnonassets(%) 7.2 6.0 5.9 7.4 2.8 2.2
Herfindahl—Hirschman Index (HHI) 5.77 5.66 5.08 5.78 5.44 4.34
Trendsinprofitabilitydifferbycountry.GiventhelargeproportionofIndianfirmsintheBarometer—theyconstituted139ofthe296publiclylistedcompaniesassessedfortheBarometer—theProfitabilityIndexreflectsmostcloselytheirresults.Theiraveragegrossmargindeclinedfrom73.7%in2004to53.5%in2009.Conversely,Chinesecompanies’averagegrossmarginclimbedfrom24.4%in2005to29.4%in2009,nodoubtreflectingtheirfocusonlocaldemand,whichwasrelativelyinsulatedfromtheeconomicturmoilinWesternmarkets,onwhichIndiancompaniesdepend.
Theonlyothercountrieswhereaveragegrossmarginsimprovedfrom2004to2009wereIndonesiaandSingapore.OnepossiblereasonisthatIndonesiancompaniescouldtapintoalargerdomesticmarketwhich,despiteitsrelativeimmaturity,isparticularlyattractedtomobiledataandsocialmediaservices.Thismakesitafertilegroundforapplicationsdevelopmentinthosespaces.Singapore-basedcompaniestendtoofferserviceshigherupthevaluechain.
GivenhowthefocusandoperationsofITservicesfirmsdifferfromoneAsiancountrytothenext,uniquefactorswillcontinuetodriveprofitabilityineachmarket.ThiscouldtranslateintomarkedprofitabilityvariationswithinAsiaintheyearsahead.Eachcompany’sprofitabilitywillbeheavilydependentonitsparticularproductandmarketspread.
© The Economist Intelligence Unit Limited 201210
Asia Competition Barometer:Information technology services
Case study: Wipro
Wipro: Opportunities in AsiaWipro,anIndianconglomeratewithalargeITservicesbusiness,has
expandedacrosstheworldoverthepastdecade.Wipro’sITbusinesstodayemployssome131,000peopleacrosstheworld.
Though Wipro has established itself globally by providing IT services tofirmsindevelopedWesternmarkets,todaythecountriesclosertohome—includinginIndia,Japan,therestofAsiaandtheMiddleEast—contributeabout20%ofthefirm’sglobalrevenues.“Thishasbeenthefastestgrowinggeographyforus,”saysRajatMathur,Wipro’sseniorvicepresidentandchiefsalesandoperationsofficerforAsiaPacificandJapan.“Mostofthecountriesinthisregionareshowingveryhigheconomicgrowthanditishenceimportantforustotapintothesemarketsandbepartoftheirgrowthstory.”
ButthisgrowthisattractingWipro’scompetitorsaswell.MrMathurseesmanyfirmsinvestingintheregion,drawnby,amongotherthings,“largeend-to-endandturnkeydeals”happeninginplacessuchasChina,Indonesia,MalaysiaandVietnam.“Theregionisinterestingnotonlyasamarketbutalsoasaresourcingdestinationsincethereisa
largeandcost-effectivetalentpoolavailableprovidinganinterestingextensiontoourglobaldeliverymodel,”MrMathursays.
WiprofacescompetitionfromforeignMNCs,IndianMNCs,aswellasotherlocalplayersinAsia.Nevertheless,MrMathurdoesnotreallyseethemasthreats.“Themarketislargeandthereisenoughtodoforallofus,”hesays.
Giventheregion’storridgrowth,MrMathurbelievesthatAsia’scontributiontoallfirms’revenueswillincreasesubstantiallyintheyearsahead.Furthermore,heexpectslocalAsianfirmstogrowandexpandacrosstheworld.“Allthiswillpresentinterestingopportunitiestocollaboratewitheachotherinsomecasesandcompeteinothers,”hesays.
Cloudcomputing,mobilityandotheremergingtechnologieswillhaveamajorimpactontheindustry.MrMathuralsocitesthreelargertrendsthatwilldriveITspending:“ITvariabilisation”(convertingfixedITcoststovariableones);“ITconsumerisation”(increaseduseofconsumertechnologyintheworkplaces);andtheincreaseduseofbusinessanalytics.
Inordertoboostprofitability,MrMathurbelievesthatWiproandotherITservicesfirmswillhavetooffertheircustomersbettervaluewhilerelentlesslydrivingdowncosts.
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Asia Competition Barometer:Information technology services
Positioning for success in Asia
Competing for the new frontier: Asia’s markets
Although the recession delayed or decreased the IT services orders of many companies in the Western world,personaldemandforITproductsandservicesinAsiagrewsteadilythroughoutthatperiod,
especiallyinChina.Asprivateconsumptionintheregiongrows,theITservicessectorwillbepoisedtobenefit.
TheEIUforecaststhatChina,bolsteredbyavastpotentialruralmarketandcommittedgovernmentsupport,willovertakeJapantobecometheworld’ssecond-largestITmarketin2013,behindonlytheUS.China’sInternetpenetrationwillbecloseto60usersper100peopleby2016(seeFigure4).Theexplosionofconsumerdemand,pairedwithstronggovernmentsupportandinvestmentininfrastructure,willdrivethegrowthofthedomesticITsector.Thatsaid,governmentinterferenceandcensorshipmayprovetobeobstaclestothesector’sdevelopment.
Figure 4: Internet users(per 100 people)
0
20
40
60
80
100
VietnamThailandSingaporePhilippinesMalaysiaIndonesiaIndiaChina
2010 2016
Source: ITU, EIU
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Asia Competition Barometer:Information technology services
CompaniescansimilarlytaptheIndiandomesticmarket,thoughthepotentialappearssmallrelativetoChina.TheEIUestimatesthatonly6%oftheIndianpopulationusedtheInternetin2010—thesecond-lowestrateoutofthecountriesstudied,aboveonlythePhilippines.TheEIUforecaststhatIndia’sInternetpenetrationratewillreachalmost10outof100peopleby2016.TheNationalAssociationofSoftwareandServicesCompanies(NASSCOM),anIndiantradechamber,seesITservicesasoneofthefastest-growingsegmentsinIndia’sdomesticmarket.Public-sectorreformsthatencourageITacceptance,likeNationaleGovernanceProgrammes(NeGP)andtheUniqueIdentificationDevelopmentAuthorityofIndia(UIDAI)programme,mayalsoencouragehigherITadoption.
Ofthecountriesstudied,afterChinaandIndia,SingaporeandMalaysiahavethehighestIT-servicesspendingforecastsfor2016,atUS$3.9bnandUS$3.3bnrespectively(seeFigure5).TherearesignsthatAsianITservicesfirmsarelookingwithinAsiaforopportunities.However,itistooearlytogaugethesuccessoftheseefforts.Initsfinancialyear2009,only6%ofTCS’srevenuescamefromtheAsia-Pacificregion.Itissimilarlyunclearifcompanies’cross-penetrationistotakeadvantageofdomesticgrowthwithintheseAsianmarkets,ortoreapcostorproximityadvantagestoservicetraditionalmaturemarkets.AcommonconsensusisthatIndianfirmsreachintoChinaprimarilytohavelocalbranchestoservicemultinationalfirmsthatoperatethere.Forexample,whileWiproisexpandingintoChina,atleastpartofthemotivationhasbeentouseChinaasanoutsourcingbaseforJapan’smoredevelopedmarket.
Figure 5: IT services spending(US$bn)
0
5,000
10,000
15,000
20,000
25,000
30,000
35,000
VietnamThailandSingaporePhilippinesMalaysiaIndonesiaIndiaChina
2010 2016
Source: IDC, EIU
Nevertheless,asChinesemultinationalsgrowinsize,andthecostofdoingbusinessbothathomeandabroadrises—ChinesewageincreaseshavebeenthreetimesasfastasanyotherAsianmarketforthepastdecade,andChina’soverallworkforceislikelytoshrinkafter2015,puttingfurtherpressureonwages—businessleaderswillstarttothinkmoreaboutIT-enabledefficiencydecisions.Theywilllikelyfollowtheleadoftheirpeersindevelopedcountries,andengagemorewithITservicesproviders.
Inordertocapitaliseonthisgrowth,inNovember2011SAPannouncedthatitwouldinvestmorethanUS$2bnoverthenextfouryearsinChina,openingfivetosixnewoffices,anddoublingitsworkforceinthecountry.10SAPsaidthattheinvestmentwillbegearedtowardsnewproductresearch,aswellasimprovingservicesforitslocalandglobalclients.
10“SAPtoInvestUS$2BillioninChinaExpansion”.PCWorld.Nov15th2011
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Asia Competition Barometer:Information technology services
Firms will broaden their footprint across Asia for efficient service deliveryTwotrendsareforcinglargeITservicesfirmstobroadentheirfootprintacrossAsia.ThefirstisatalentshortageinplacessuchasIndia,whichhasbeendrivingupwagesthere.AccordingtoareportcommissionedbyNASSCOM,IndiafacesanITtalentshortfallofbetween800,000and1.2mworkersby2012,withrisingsalariesandanappreciatingrupeeexacerbatingtheindustry’swoes.11
ThesecondistherelativelyhighergrowthoutlookforITservicesinAsiaversusotherregions(seeFigure6),whichispromptingfirmstorejigtheirservicecapacitiestowardsAsia.
11Findingcitedin“Resilienceamidturmoil:BenchmarkingIT industry competitiveness 2009”.TheEconomistIntelligenceUnit.Sep2009
Figure 6: Aggregate regional IT services spending(% growth per annum)
-4
-2
0
2
4
6
8
10
12WorldWestern EuropeUSAsia and Australasia
2016201520142013201220112010
Source: IDC,EIU
Some Indian companies, for instance, have for several years been building up their operations abroad:InfosysandTCS,forexample,havesetupunitsinthePhilippines.AccordingtoGartner,anITconsultancy,IndonesiaandVietnamareemergingasthelow-costleadersinthesector.12 Malaysia, meanwhile,isattractingmuchinvestmentin,amongotherthings,sharedservicesoutsourcing.
Aslower-valueworkmovesabroad,firmsinIndiaarestrivingtomoveupthevaluechain,focusingonR&Dandtheuseofnewtechnologiesinordertogrowrevenueswithoutincreasingheadcount.Thistrendwillcontinue,asITservicesfirmsarestillintheearlystagesofleveragingtheirglobalfootprintforthemostcost-effectiveservicedelivery.Thisshiftwillalsoprovidegrowthopportunitiesfordomesticfirmsinthesenewmarkets.
Emergent technologies FirmsofferingnicheservicesfocussedonemergenttechnologiesarelikelytoexperiencerapidgrowthinAsiaoverthenextfewyears.ThisispartlybecauseofAsia’sseculargrowthstory,butalsobecauseoftheregion’sgenerallyhighadoptionratesofnewtechnology,aswellastechnologyleapfrogging.Forinstance,manyconsumersbypasslandlinesanddesktopcomputersinfavourofmobiledevicesandthishasledtoaspikeinmobilepenetrationrates.
Asia’scloudcomputingmarketispoisedtoexpand,bothforcloudconsumersaswellascloudproviders,accordingtoJohnGalligan,regionaldirectorforInternetPolicyatMicrosoft.“TheknowledgeeconomywillfuelAsia’sfutureandwethinkthatcloudcomputingisthenextgreat‘leveller’forthe
12“Gartner’s30LeadingLocationsforOffshoreServices,2010-2011”.Gartner.Dec20th2010
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Asia Competition Barometer:Information technology services
region,poisedtohelpacceleratethemomentumaroundtrade,”hesaidatthelaunchofAsia’sfirst“CloudReadinessIndex”inSeptember2011.13
Similarly,demandforsocialmediaservicesislikelytogrowrapidlygiventhepopularityofsocialnetworkinginAsia.Forinstance,IndonesiahasthesecondlargestnumberofFacebookusersintheworld(aftertheUS),withabout40mpeople.India,currentlyinthirdplacewithmorethan32musers,isfastcatchingup,buoyedbyFacebook’sdecisiontoofferamobile-onlyversioninsome40countries,includingIndia,whichcanbeusedwithoutincurringanydatacharges.14CompaniesinAsiaareincreasinglyusingsocialmediamonitoringandmarketingtoolstoengagewiththeircustomers.
Location-basedmobileservicesshouldalsoenjoystronggrowthinAsia,asconsumersintheregionincreasetheiruseofsearch,mapsandnavigationservicesthatrelyonlocationinformation.StrategyAnalytics,aresearchfirm,forecaststhatglobalconsumerandadvertiserexpenditureonlocation-basedserviceswillreachUS$10bnby2016,withAsia-Pacificaccountingfor20.5%ofthatmarket.15
13“Asia’sfirst“CloudReadinessIndex””.AsiaCloudComputingAssociation.Sep7th 2011
14“IndiaFacebookUsersGrowingFast,MayOvertakeIndonesia”.Penn Olson.Aug16th2011
15“The$10BRule:Location,Location,Location”.StrategyAnalytics.May20th2011
Case study: TIBCO Software
TIBCO Software: Niche services, broad opportunitiesTIBCOSoftwareisanAmericanproviderofinfrastructuresoftware
thatenablescompaniestocaptureandprocesstime-sensitiveinformation,aidingtheirdecision-makingprocesses.Asiacontributesabout10%ofTIBCO’sglobalrevenues,andisthefirm’sfastest-growingregiontoday,withyear-on-yearrevenuegrowthof45%in2010.
Inrecognitionoftheregion’spotential,TIBCOhasgrownitspresenceinAsiarapidly.From2006to2010,itsheadcountinAsiadoubled.AlmostaquarterofitsglobalworkforceisnowbasedinAsia.“Someofthemostcutting-edgeandworld-classstuffthatwedotodayisinAsia,”saysNeerajShaabi,managingdirectorandregionalvicepresidentforTIBCOinAsia.
AccordingtoMrShaabi,thisispartlybecausemanypartsofAsiadonothavetoworryaboutlegacyinvestments.“Greenfieldprojectsheredonotgetencumberedbyconsiderationsaboutpastinvestments,”hesays.“Theycaneasilyadoptcutting-edgetechnology.”
Forinstance,TIBCOhasdoneworkforRelianceTelecommunicationsinIndiatohelpitbetterunderstanditspre-paidmarket.“Theyhavenorelationshipwiththecustomerbecausethereisnomonthlybill—thereisnocustomerprofile,”hesays.Asaresult,traditionalCRM(customerrelationshipmanagement)softwareandanalyticsdonotwork.
“Wearehelpingcompaniesbecome‘realtime’andwefindthatfirmsinAsiaaremoreopenandwellpositionedtomakethatleapforward,”saysMrShaabi.HecontrastsyoungAsianfirmswithothercompaniesthatmaybeoverinvestedinlargedatacentresanddata-miningtechnologies,whichhebelievesis“thetwentiethcenturywayoflookingatthings”.
GivenTIBCO’snichefocus,ithasnotreallyfacedmuchcompetitioninAsia.“Giventheuniquerealtime,event-drivennatureofourproducts,wedon’treallyseeintensecompetitioninourspace,”MrShaabisays.Infact,TIBCO’schallengeisinmakingsureithasthenecessarycoverageacrossdifferentAsianmarketsinordertobidforallthecontractsoutthere.
Inparticular,MrShaabisaysthatTIBCOhashardlyanyAsiancompetitors—itsmaincompetitorsarethelikesofIBMandOracle.Nevertheless,hebelievesthebroaderITservicesmarketisexperiencingintensecompetition,partlyduetothecommoditisationofcertainservices.AllthatcouldeventuallyaffectTIBCO,because“muchofITisacatch-upgame.Weareuniquetoday,butwemaynotbeuniquetomorrow.”MrShaabiaddsthatthebigITservicesfirmsarealreadymakingthenecessaryinvestmentstoimprovetheircapabilitiesinTIBCO’sspace.
Tostayahead,MrShaabibelievesthatTIBCOwillhavetocontinuouslyfindwaystotransformitsclients’businesseswithitssoftwareservices.
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Outlook
AlthoughtheITservicesindustryinAsiahasbeengrowingrapidly,profitabilityhasbeenonadownwardtrendoverthepastfiveyears,largelyduetoincreasedcompetitioninthesector.Facing
slowergrowthinthedevelopedWesternmarkets,andfendingofftheadvancesoflower-costproviders,ITservicesfirmswilleitherhavetomoveupthevaluechaintomaintainprimacyinthedevelopedworld,createscaletocompeteinhigh-volumeservices,orshiftemphasistotakeadvantageofthehighergrowthintheemergingmarkets.
Withmanyglobalcompaniesheadquarteredindevelopedmarketsstillseekingtocontrolcostsandestablishefficientoutsourcingarrangementsfortheirbusinessprocesses,theymayshifttheirbusinessawayfromtraditionalcentressuchasIndia,wherewagesarerising,towardslower-costcountriesinAsiaandotheremergingregions.Forexample,theUSisbeginningtoseemoreallureinthesizeabletalentpool,serviceableinfrastructure,andimprovinggovernmentsupportofLatinAmericancountriessuchasMexico.GartnerconsidersplacessuchasBulgaria,theCzechRepublic,Egypt,Hungary,Mauritius,Morocco,Poland,Romania,Russia,Slovakia,SouthAfrica,TurkeyandtheUkraineaspossibleoutsourcingalternativesforWesternfirms.16
Ontheproductfront,traditionalindustryleadersmaybeabletogrowprofitmarginsbyprovidingnewtechnologiessuchascloudandmobilecomputing.Forcompaniesoperatingindevelopedmarkets,theyareperhapsmorelikelytobuildcompetitiveadvantageinthefuturethroughtheuseofhigher-qualityratherthanlower-costlabour.
Inparticular,companiesthatarelosingtheirlabourcostadvantagebutwishtocompeteindevelopedmarketswillneedtoemployworkerswithnotonlytechnicalITskills,butalsosoftermanagementskills,suchasentrepreneurship,innovationandmarketing.Companiesthatwishtobreakawayfromgrowthdependentonabundant,low-costlabourwillneedtogenerateintellectualpropertyanddevelopnewplatformsforservicedelivery.Amongotherthings,ITservicesfirmswillneedtocontinuetoinvestintrainingandcollaboratewithuniversitiesinordertoensureaccesstoskilledlabour.
16“Gartner’s30LeadingLocationsforOffshoreServices,2010-2011”.Gartner.Dec20th2010
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Currenttrendsintheindustrysuggestthatsmallerfirmsaremostatriskfromthecompetitivelandscapethatisemerging.Sizeandscalebecomeincreasinglyimportantdeterminantsforglobalfirmsseekingoutsourcingpartnerstoenhancetheirownoperationalefficiencies.TheyarelikelytoseekITpartnerswhocanprovideafullrangeofcost-effectiveservicesinmultiplelocations.
Ontheotherendofthedemandspectrum,however,smallandmedium-sizedenterprisesaremorelikelytousecloud-basedservicesratherthanthird-partyITservicesplayers,forreasonsofcost.Asmass-market,cloud-enabledservicesbecomeubiquitous,priceswillfall,andthebestperformingfirmswillbeeitherthosethatcantakeonahighvolumebusinessinacost-effectivemanner,orthosethatcanprovideahighlyspecialisedornicheservice.
MrShaabiatTIBCObelievestherewillalwaysbeopportunitiesforsmallerfirms,partlybecausebigfirmstendtobecomedependentontheir“cash-cow”businesses,andmaynothavethecommercialmotivationtoventureintonichefields.“Smallfirmswhodonothavethesecashcowbusinessmodelsareabletoinnovatefurther,”hesays.Asia’srapidlyevolvingITservicesmarketislikelytothrowupopportunitiesforbigandsmallfirmsalike.
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Barometer methodology
Toassesstheintensityofcompetitionandunderstandthechangingmarketdynamicsinkeysectors,theEconomistIntelligenceUnit(EIU)hasdevelopedtheAsiaCompetitionBarometer.Drawing
uponcompany-leveldataonprofitabilityandotherindicators,theBarometerquantifiesthechangingdynamicsofcompetitivenessinAsiaforselectindustriesbetween2004and2009.
Assessingauniverseof296publiclylistedinformationTechnology(IT)servicescompaniesacrosseightcountries—China,India,Indonesia,Malaysia,thePhilippines,Singapore,ThailandandVietnam—theBarometerexamineschangingprofitabilityandthecompetitionlandscapefortheITservicessector.
How do we define the IT services sector? WhilebothIThardwaremanufacturersandsoftwarecompanieshaveasignificantpresenceinthe
Asia-Pacificregion,itistheITservicessectorthathasattractedtheattentionofforeignanddomesticcompaniesinrecentyears.AstheITsub-segmentwiththehighestvalue-added,wewouldexpecttoseepronouncedtrendsinprofitabilityandmarketcompetitioninthecontextofAsia’sfast-changingeconomicenvironment.Inthecontextofthisanalysis,theITservicessectorincludesthefollowingsub-segments:17
softwaredevelopment,includingcomputergames;ITprogramming;ITconsultancy;ITfacilitiesmanagementservices;otherITandcomputerserviceactivities;dataprocessing,hostingandrelatedactivities;andwebportals.
Methodology TheBarometerhastwodimensions:profitabilityandmarketconcentration.
Profitability IndexToassesstheaggregateprofitabilityoftheITservicessectorinAsia,theEIUdevelopedacompositeindexoffiveratiosthateachrepresentadifferentaspectofacompany’sprofitability:
17BasedonNACE(nomenclaturestatistiquedesactivitéséconomiquesdanslaCommunautéeuropéenne)2.0classification.NACEisthestatisticalclassificationof economic activities in the EuropeanCommunity.
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• EBITDA margin (%):Ameasureofacompany’soperatingprofitability.Itisequaltoearningsbeforeinterest,tax,depreciationandamortisation(EBITDA)dividedbytotalrevenue.BecauseEBITDAexcludesdepreciationandamortisation,EBITDAmarginprovidesaclearerviewofacompany’scoreprofitability.Anincreaseincompetitionmayputpressureonanindustry’sprofitmargins.
• Gross margin (%):Whenusedasamarketmeasureofcompetition,grossmarginmeasurestheprofitabilityconsideringonlythecostsofgoodssold.Thehigherthepercentage,themorethecompanyretainsoneachdollarofsalestoserviceitsothercostsandobligations.Anincreaseincompetitiontendstoreducefirms’abilitytoincreasepricesandtherebyincreaseitsgrossmargin.
• Return on capital employed (%):Ameasureoftheefficiencyandprofitabilityofacompany’scapitalinvestments.Returnoncapitalemployedalsoindicateswhetherthecompanyisearningsufficientrevenuesandprofitsinordertomakethebestuseofitscapitalassets.Anincreaseincompetitionmayrequirefirmstoemployadditionalcapitaltomaintainprofitability.
• Return on equity (%):Ameasureoftherateofreturnontheshareholders’equity.Itmeasuresafirm’sefficiencyatgeneratingprofitsfromeveryunitofshareholders’equity.Returnonequityshowshowwellacompanyusesshareholderfundstogenerateearningsgrowth.Ariseincompetitiontendstoputpressureonreturnsonshareholderfunds.
• Return on assets (%):Ameasureofhowprofitableacompany’sassetsareingeneratingrevenue,orhowprofitableacompanyisrelativetoitsassets.Returnonassetsdeterminesacompany’sabilitytoutiliseitsassetsefficientlyandeffectively.Highercompetitiontendstoputpressureonfirms’abilitytomaintainreturnonassets.
Weaggregatedcompany-leveldatafor296publicly-quotedITservicescompaniesandexaminedtheirprofitabilityratios.Toenableobservationoftrendsovertime,acompositeProfitabilityIndexwasdeveloped(whereyear2005=100).EBITDAandgrossmarginaregivenahigherweightingintheindexastheyspeakdirectlytobottomlineprofitability,whilethereturnoncapitalemployed,returnonequityandreturnonassetsratiosspeaktohowacompanymakeuseofitsvariousresourcestodrivereturn(i.eefficiency/productivity).
Profitability indicator Weight in Profitability Index
EBITDAmargin(%) 35%
Grossmargin(%) 35%
Returnoncapitalemployed(%) 10%
Returnonequity(%) 10%
Returnonassets(%) 10%
Market concentration Toassessmarketconcentration,theEIUcalculatedtheHerfindahl-HirschmannIndex(HHI)fortheITservicessectorinAsiafrom2004to2009.Ameasureofthesizeofcompaniesinrelationtotheindustry,
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andanindicatoroftheamountofcompetitionamongthem,theHHIisdefinedasthesumofthesquaresofthemarketsharesofthe50largestfirmsfromtheuniverseof296listedcompaniesassessed.18HHIvaluescanrangefrom0to1.0,movingfromanextremelyfragmentedmarket(0)toamonopoly(1).HHIvalueshavebeenmultipliedby100toachieveascaleconsistentwithprofitabilityindicators.ArisingHHIindexgenerallyindicatesfallingmarketcompetition,whileafallintheHHIsuggeststhatcompetitionisincreasing.
18Orsummedforallthefirmsin the case that there are fewerthan50.
Whilsteveryefforthasbeentakentoverifytheaccuracyof this information, neither The Economist Intelligence UnitLtd.northesponsorofthisreportcanacceptanyresponsibility or liability for reliance by any person on this report or any of the information, opinions or conclusions setoutherein.